D-Mart Valuations

It may appear to be steep, but it is hardly overpriced…

There were some real concerns when Avenue Supermarts (the company that operates the chain of D-Mart Stores) actually reported lower profit growth in the September quarter. The profit growth fell from above 35% in the previous quarter to a level of 26%. This sharp fall in profit growth led to concerns that the valuations may be a little too steep for comfort at 90-95X. While the concerns are justified, investors do not need to get overly worried about the same. Here is why!

It is the GST effect… 

The real reason for the sharp fall in profit growth during the September quarter was a direct outcome of aggressive re-stocking that the company had done in the aftermath of the GST launch. The GST implementation impacts retail players in a big way. The restocking that we are seeing is in a way the reversal of the de-stocking that happened in the immediate aftermath of the GST launch. The company had already cautioned investors and analysts that the GST could have a lag effect in the form of re-stocking. For a retailer this creates problems of a larger gap between the cost of goods and the sale of goods. It is this time lag that has caused this problem and should rectify itself on its own in the months to come. Secondly, there is a base effect and the traction will now be more visible as the company embarks on its next phase of capacity expansion across India.

Growth and debt reduction… 

The two big stories post the IPO are still intact for D-Mart. Firstly, the company has continued to expand its footprint in a big way. The primary focus of bringing sales outlets closer to the customer continues and that should continue to remain its forte. As D-Mart continues to churn out its salivating discounts, the retail business in India is likely to spur further. D-Mart combines two key aspects of the retail business. On the one hand it brings you the benefits of large-retail in the form of lower costs. On the other hand, D-Mart brings you the added advantage of accessibility that your Kirana shop down the street offers. Secondly, the company will use the IPO proceeds to reduce its debt on the retail properties that it owns. That impact on EBIT margins should start showing up soon. In a nutshell it is a combination that is going to be extremely hard to beat.

What should investors do?

In the investment world; whenever you are doubt you should adopt a phased approach. Don’t get intimidated by the P/E ratio of D-Mart. It will eventually justify these valuations. The trick is to use any dips in the stock price to add on to the stock. Over the next few months, if you can reduce your holding cost of D-Mart, the job is half done. There really is no better proxy for the Indian consumer growth story! ©

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: